Contract Review, Risk Report and Negotiation Brief: Catching the Clause That Costs You Later

A contract review before signature is the last point in a deal where you still have leverage. Once signed, section 75 of the Contracts Act 1950 caps what a business can recover on a bad liquidated-damages clause to "reasonable compensation not exceeding the amount... stipulated" — regardless of the actual loss. This guide sets out what a structured contract review actually checks, the clause types that cause most disputes under Malaysian law, and how a risk report and negotiation brief turn a marked-up draft into a decision you can act on.

Most businesses only read a contract closely after something in it has already gone wrong. The document arrives from the counterparty's solicitors, the commercial team is under deadline pressure to sign, and legal input gets compressed into "can you check this is okay" the day before. By the time a dispute exposes a bad clause, the business is already bound by it.

What does a contract review actually check?

A structured contract review, risk report and negotiation brief works clause by clause, not page by page. It is checking what each provision actually does to the business, not whether the drafting reads smoothly. That is a different exercise from the kind of general risk-spotting covered in our guide to red flags in legal due diligence, which looks across a whole transaction rather than one agreement.

Why does a liquidated damages or penalty clause need special attention?

Section 75 of the Contracts Act 1950 states: "When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."

Malaysian law does not draw the distinction, familiar from English case law, between a "genuine pre-estimate of loss" and an unenforceable "penalty." A Malaysian court can award reasonable compensation up to the stated sum without either party proving actual loss — but critically, it is a ceiling, not a floor. If the real loss on a serious breach would run well above the number in the clause, the business recovers no more than the ceiling it agreed to. A review has to stress-test that number against the worst plausible breach, not just the likely one.

When is a non-compete or restraint-of-trade clause actually enforceable?

Section 28 of the Contracts Act 1950 is blunt: "Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void." There are only three statutory exceptions — a restraint tied to the sale of the goodwill of a business, an agreement between partners in anticipation of dissolution, and an agreement between partners not to compete with the partnership while it continues.

In practice, this means a non-compete imposed on an employee, a supplier or a service provider — outside those three narrow situations — is generally unenforceable in Malaysia, however firmly it is drafted. A risk report should flag two things in opposite directions: do not trade away commercial terms to win a non-compete that a Malaysian court is unlikely to enforce, and do not assume a restraint imposed on your business is automatically toothless without checking whether it falls within one of the three exceptions — a restraint tied to a genuine goodwill sale usually does bind.

What happens if the contract is silent and the other side breaches?

Where a contract has no liquidated damages clause, section 74 governs: compensation is payable for loss that "naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach," but not for loss that is "remote and indirect." That can recover more than a badly-drafted LD clause would have capped — but it means proving the loss, which is slower and less certain than pointing to an agreed figure. Our guides to contract termination and breach of contract cover what happens once a dispute is already underway; a review exists to reduce how often a business ends up needing them.

What if performance becomes impossible, or the deal environment changes?

Section 57 of the Contracts Act 1950 provides that a contract to do an act which afterwards becomes impossible, or unlawful, becomes void when the act becomes impossible or unlawful. In practice, most commercial agreements displace this default position with a drafted force majeure clause that sets out, event by event, what suspends performance, what allows termination, and what notice and mitigation duties apply in between. A review should check what the force majeure clause actually covers — a clause that lists specific events narrowly can leave a business with no relief at all for something the drafters did not anticipate.

How long does a bad clause stay a risk after signing?

An action founded on a contract generally must be brought within six years of the date the cause of action accrues, under section 6(1)(a) of the Limitation Act 1953. Signing without review is not a one-off cost — the clauses in the document sit on the business as exposure for up to six years, whichever side of a dispute the business ends up on.

Common red-flag clauses and what to do about them

What it costs to skip the review

The cost of a bad clause rarely shows up until the business is already relying on it. An uncapped indemnity is invisible until a claim arrives that dwarfs the contract value. A liquidated damages clause set too low looks generous right up until the breach that actually happens is the expensive one. A non-compete that was never enforceable stops a hire the business thought was blocked, or fails to stop a departing employee the business thought was bound. None of these show up on the signature page — they show up months or years later, when the business has lost the only point in the process where the terms were still negotiable. A review, risk report and negotiation brief exist to put that decision back in front of the business while it still has a choice.

Frequently Asked Questions

What does a contract risk report actually contain?

A ranked list of the exposures in the agreement, ordered by commercial consequence rather than by where they sit in the document, together with what protection each risk is missing and what a negotiation position on it looks like.

Is a liquidated damages clause always enforceable in Malaysia?

The clause itself is generally enforceable under section 75 of the Contracts Act 1950, but the amount recoverable is capped at the figure stated, and a court will only award what it considers reasonable compensation up to that ceiling — not necessarily the full amount named.

Can a non-compete clause in a commercial agreement be enforced in Malaysia?

Only if it falls within one of three narrow exceptions in section 28 of the Contracts Act 1950 — tied to the sale of business goodwill, or between partners around a dissolution or during a partnership. Outside those situations, a restraint of trade clause is generally void.

How long is a business exposed to risk under a signed contract?

Generally up to six years from the date a breach occurs, which is the limitation period commonly cited for contract claims in Malaysia. A contract signed without review carries that exposure for its full term plus that period afterwards.

Should a business get a contract reviewed even after it has been signed?

Yes. A review after signature cannot renegotiate the terms unilaterally, but it sets out the business's actual position under the agreement and what options exist, including whether the counterparty would agree to a supplemental or variation agreement.

Getting this reviewed before you sign

Review before signature is the only point in the process where the business still has full leverage to change the terms. Legal That Works advises Malaysian businesses on our contract review, risk report and negotiation brief service — a clause-by-clause review, a risk report ranking the exposures by commercial consequence, and a negotiation brief setting out a position on every material point. If a contract is sitting in your inbox with a deadline attached, speak to us before it is signed rather than after.

This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.

Related guides

• Red flags in legal due diligence

• Contract termination

• Breach of contract